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Interpretation of limitation and exclusion clauses

October 2016 - Issue 86

The importance of reviewing your agreements to understand their natural meaning

The case of Transocean Drilling UK Ltd v Providence Resources plc [2016] EWCA Civ 372 demonstrates the difficulty for judges in interpreting limitation and exclusion clauses. This establishes that the natural meaning of the language used in agreements is now of greater importance and aged rules should be used as a last resort where wording is not clear.

Eight months into a hire agreement between Transocean, the owner and operator of a drilling rig and, Providence, the drilling of a well off the southern coast of Ireland was suspended. The consequential delays escalated into various disputes.

At first instance, it was held that the cause of the delay had been down to the rig not being in good working condition, with additional delays being caused by a crew member failing to tighten part of the fixture. Popplewell J concluded that Transocean was in breach of contract and ordered that Providence were entitled to recover spread costs (specifically the wasted cost of support vessels supplied by third parties).

Transocean appealed against this decision on the basis that the LOGIC standard form contact used contained provisions relating to exclusions of liability on a ‘knock for knock’ basis. The issue for the court to consider was whether the wasted spread costs were covered by the wording “loss of use” within the consequential loss provision.

The court held that the starting point was the natural meaning of the language used. It was held that Transocean was able to exclude its liability for the wasted spread costs as the wording “loss of use” gave examples in brackets which were intended to flesh out the meaning of the words “loss of use”. Wasted spread costs were held to be included within the meaning of this.

Although the court’s task of interpretation is not straight forward, the Transocean decision is helpful to assist judges in the future, as well as parties and their legal advisers, in both onshore and offshore construction matters. Reviewing proposed agreements prior to signing and commencing work is as important as ever so as to ensure the natural meaning of the words used matches your understanding of the deal you have struck. Contact a member of our team to discuss our fixed price contract reviews.